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Breakeven analysis.

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Introduction

Breakeven analysis The breakeven point for a firm is when total costs equals total revenue. Expenditure and income are the same and the firm makes neither a profit or a loss. If the firm can sell at production levels above this point, it will be making a profit. If sales fall below this point, it will be making a loss. Establishing the breakeven point helps a firm to plan the levels of production it needs to be profitable. Before you can calculate the breakeven point, you need to separate the firm's costs. These include: Fixed costs These are constant and do not change however many goods are produced. They include rent and insurance. ...read more.

Middle

on the horizontal (x) axis, and costs and revenue on the vertical (y) axis. On to this, you plot a horizontal fixed costs line (it is horizontal because fixed costs don't change with output). Then you plot a variable cost line from this point, which will, in effect, be the total costs line. This is because the fixed cost added to the variable cost gives the total cost. To do this, you multiply: variable cost per unit x number of units In this example of the CD manufacturing firm, you can assume that the variable cost per unit is �2 and there are 2 000 units = �4,000 Once you have done this, you are ready to plot the total revenue line. ...read more.

Conclusion

There are two simple equations you can use to double-check your answer. You can calculate the breakeven point in: - units - costs/revenue Either way, the result should be the same. Calculating in units Learn this equation: Breakeven point in units = Fixed Cost/(Sales Price - Variable Cost) So using the CD example: 10,000/(6 - 2) = 10,000/4 =2,500 CDs Calculating in costs/revenue Learn this equation: For the breakeven point in costs/revenue, you then multiply the breakeven point in units, which you have just calculated, by the sales price. 2,500 x 6 = �15,000 If you look at the breakeven chart, you will see this is the correct answer. Remember Breakeven analysis is a favourite exam topic. In an exam, you could be asked to complete a breakeven chart. With these two equations, you'll be able to double check your calculations, get them right and improve your marks. ...read more.

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